The second-quarter earnings season is expected to be strong, with the S&P 500 index anticipated to see earnings growth of 5.6% and revenue growth of 4.5%, per the latest Earnings Trends. The stock market is also at record levels. However, the ongoing turmoil in Washington, geopolitical risks, Fed-related uncertainty, and lofty valuation could bring some difficulties for stocks this season (read: Sector ETFs & Stocks to Tap Q2 Earnings Growth).
While five of the 16 Zacks sectors are expected to post double-digit earnings growth, six sectors would lag. Plus, the current earnings estimate is down from 7.9% projected at the start of the second quarter. Amid such volatility, investors should focus on ETFs with large allocations to stocks that have a high chance of surprising in their upcoming release. This could result in a winning bet this earnings season.
How to Find ETFs?
Handpicking ETFs with a portfolio of stocks that are most likely to beat on earnings is no mean task. However, our proprietary methodology of finding out the Earnings ESP of stocks by calculating the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate is a solid building block.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Betting on ETFs with the winning combination of stocks that have a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) would lead to profits in investor portfolios. This is especially true as an earnings beat will definitely draw investors’ attention and propel the stock price and related ETFs higher. Let’s see how the ETFs have been selected with this combination of stocks.
First, we ran our Zacks stock screener to find out the stocks with a positive Earnings ESP and a favorable Zacks Rank. Then, we narrowed down the list by selecting the group of stocks with higher positive Earnings ESP. Accordingly, we chose three ETFs, which contain few stocks with higher chances of beating estimates in a particular industry (see: all the ETF Categories here).
Our research shows that for the stocks with this combination, the chance of a positive earnings surprise is as high as 70%. As a result, this trio could be excellent for investors seeking sure profits this earnings season.
PowerShares Dynamic Leisure and Entertainment Fund (PEJ - Free Report)
This fund tracks the Dynamic Leisure and Entertainment Intellidex Index and holds a small basket of 30 stocks. It is pretty well spread out across various securities as each holds less than 5.6% of total assets. About half of the stocks in the portfolio are expected to come up with an earnings beat, suggesting a solid upside for the ETF. In particular, American Airlines (AAL - Free Report) , Delta Air Lines (DAL - Free Report) , McDonald's MCD and Time Warner (TWX - Free Report) , which are among the top five holdings and account for 5% share each, have an Earnings ESP of +4.62%, +0.60%, +4.94%, and +2.56%, respectively. AAL and DAL have a Zacks Rank #1 while the other two have a Zacks Rank #2.
From an industry look, restaurants and airlines take the largest share at 31% and 21% of PEJ, respectively, followed by hotels & leisure facilities (21%) and casinos & gaming (13%). The ETF has amassed $126.4 million in its asset base and trades in a light volume of 28,000 shares a day on average. Expense ratio comes in at 0.61%. PEJ has a Zacks ETF Rank of 3 with a High risk outlook (read: What Lies Ahead of Leisure & Travel ETFs in 2H?).
iShares Dow Jones Transportation Average Fund (IYT - Free Report)
The ETF provides exposure to the broad transportation sector by tracking the Dow Jones Transportation Average Index. It holds a small basket of 20 stocks, half of which have higher chances of beating estimates this quarter. Air freight and logistics takes the top spot with 28.9% share in the basket while airlines (24.2%) and railroads (23.9%) round off the top three. Railroad companies like Norfolk Southern (NSC - Free Report) , Union Pacific (UNP - Free Report) , Kansas City Southern (KSU - Free Report) have an Earnings ESP of +1.84%, +1.46% and +0.79%, respectively. Meanwhile, Alaska Air Group (ALK - Free Report) , Landstar System (LSTR - Free Report) , and Ryder System (R - Free Report) have an Earnings ESP of +2.44%, +2.27% and +1.08%, respectively. All these have a Zacks Rank #2 and hold the top 10 positions in IYT.
The fund has accumulated nearly $946.3 million in AUM while sees good trading volume of around 348,000 shares a day. It charges 44 bps in fees per year from investors. While the fund currently has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook, it is expected to get a near-term boost from Q2 earnings growth (read: Transport ETF Hits New 52-Week High).
VanEck Vectors Biotech ETF (BBH - Free Report)
This fund offers exposure to 26 large biotechnology corporations by tracking the MVIS US Listed Biotech 25 Index. About 36% of the stocks in the portfolio are expected to beat earnings this quarter. Investors should note that Celgene CELG and Gilead Sciences GILD, which have a Zacks Rank #3 and account for double-digit exposure in the basket, have an Earnings ESP of +1.24%, and +2.40%, respectively.
BBH has amassed $687.8 million in its asset base and charges 35 bps in fees per year. Volume is moderate as it exchanges 45,000 shares daily on average. It has Zacks ETF Rank of 2 with a High risk outlook (read: Forget Big Tech, Biotech ETFs are Soaring Higher).
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